Large firms weigh buying or building new brands to remain relevant

Millennials surpassed boomers as the largest generation this year, and they are “proving to be very disruptive” by opting to direct their $200 billion spending power on more experimental and health-conscious foods and beverages than previous generations, analyst Nick Fereday notes in a recently published Rabobank report. Their preference for premium products sold by “small, specialized [operators] that passionately sell the mission to provide better-quality, oftentimes ethical, product” and which cast themselves as the industry underdog, spells trouble for the large food and beverage companies that have for stressed value for years, Fereday writes. “All is not lost” though, notes Fereday. He suggests large food and beverage companies can still compete and succeed as long as they are willing to adapt – and possibility let go of outdated legacy brands. To do that, he says they have two primary options: to buy or to build new brands. “These strategies are not mutually exclusive, and many companies are actively pursuing both – depending on the need they’re trying to fill, how much time they thing they have, their appetite for risk, as well as they strengths and weaknesses of the company itself,” note Fereday. When to buy Mergers and acquisitions can be a quick way for a company to expand its portfolio if it has lost is “R&D mojo,” but firms will have to choose whether to risk acquiring a small untested company, or pay high multiples for one with a proven track record, Fereday says. He explained that with many large companies searching for smaller, innovative ones, bidding wars are inevitable and they create high multiples that are tough sells to boards. Buying smaller companies at an earlier-than-normal stage in the life cycle can be less expensive, but also comes with a high execution risk, according to the report. To reduce risks and improve their change of picking a winner, Fereday recommends favoring sales velocity over absolute sales and working with accelerators, incubators and online fundraising platforms that filter out successful startups. Once a company makes a deal, it should step back and give the acquisition space to grow, Fereday recommends. He explained this will help the startup retain its authenticity and curry favor with small-company-loving millennials. If you build it right, they will come Building new brands is a much more difficult option for large companies, many of which are cutting R&D to improve margins, according to the report. But it can be done if a company is willing to go all in. To successfully build a new brand, the brand must meet a real consumer need and be truly different – so no new flavors or line extensions, Fereday said. He added the best way to find out what consumers want is to be with them in the field on an ongoing basis, rather than by hosting occasional round table discussions with focus groups. The report also notes that while trends are shifting, they “aren’t moving so fast that companies don’t have time to capitalize on them.” For examples, trends that are gaining ground and likely will stick around include the movement toward plant-based foods, “free-from” foods, reduced sugar, ancient grains, high protein and simple ingredient lists. In addition, CPGs can identify upcoming trends by watching menus and activity in food service, which often pave the way for packaged foods to follow after a few years. Once an idea is identified, the company should invest in premium ingredients and not cheap out, said Fereday. He added that millennials prefer premium in part because they are more customizable to their needs. Companies also can better mimic the speed to production of small companies by outsourcing production, which also contributes to nimbleness by allowing companies to tap into different knowledge sets, the report said. Ultimately, neither of these options is more preferable than the other, and to choose the best option for them, companies will need to carefully scrutinize their strengths, weaknesses and goals, Fereday said.

Large firms weigh buying or building new brands to remain relevant

Manufacturers of iconic food and beverage brands favored for decades by baby boomers run the risk of becoming irrelevant unless they adapt to the evolving demands of millennials, who are quickly replacing older generations as the primary purchasers, according to new research from Rabobank.

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